Stock Market Trend Lines
The popular saying in the market on Trend line is “The trend is your friend, until the end when it bends.” A Trend line ( Stock Market Trend Lines ) is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance.
An uptrend line has a positive slope and is formed by connecting 2 or more swing lows (blue arrow – below). A downtrend line, on the other hand, has a negative slope and is formed by connecting 2 or more swing highs (red arrow – below).
Using Trend lines ( Using Stock Market Trend Lines )
Trend lines are useful because:
- They provide support or resistance level
- They act as an early warning signal of trend change
“Uptrend” is defined as a series of higher highs and higher lows. In this process, the share prices move in the upward direction touching new highs. For example, in the following diagram, note that H4 > H3 > H2 > H1 and L4 > L3 > L2 > L1. Here, H4, H3, H2 are known as swing highs and L4, L3, L2 are known as swing lows.
“Downtrend” is defined as a series of lower highs and lower lows. The share price moves in the downward direction making new lows in the process. Hence, the best indication of a downtrend is the price making a lower top and lower bottom.
Flat or Sideways trend
“Flat” or “Sideways” trend is a situation where prices move in a range, neither going upward nor downward. They move in a horizontal direction for a long period of time.
Catching the trend
Markets trade in a range or stay flat most of the time. However, when the price breaks out (trades above the range) or breaks down (trades below the range) – the price extends by at least the same amount as that of the range.
- Trend lines are amongst the easiest technical tool to understand, but considerable practice is required before we can successfully interpret trend lines.
- Markets tend to move in three trends – uptrend, downtrend and sideways trend (consolidation).
- Trend line violations signal either a temporary interruption or a reversal in the prevailing trend. It is necessary to refer to other pieces of technical evidence to determine what is being signaled.
- A good Trend line reflects the underlying trend and represents an important support and resistance zone.
- The relevance of Trend lines is a function of their length, the number of times they touch and the steepness of ascent or decent